Manufacturing remains the bedrock of our local and national economy, even though its contribution to overall economic activity (GDP) is declining versus the global trend of growth in the services sectors.
The contribution of manufacturing to South Africa’s GDP has been on a steady decline, from 19.8% in 1994 to 12-13% today, a clear indicator of de-industrialisation of our local economy.
This matters because manufacturing remains a key engine of economic growth, with high economic multipliers due to its forward and backward linkages to both downstream and upstream sectors of the economy. Manufacturing is a key contributor to exports and has the biggest knock-on impact in terms of direct and indirect jobs, and thus reversing de-industrialisation is critical in addressing SA’s high unemployment levels.
Manufacturing is surrounded by a supporting eco-system of suppliers of goods, logistics and services, the impact rippling through into retail, tourism and hospitality, education, the property sector and financial, business and personal services.
Nelson Mandela Bay is the hub of the SA automotive industry, with the highest concentration of vehicle and component manufacturers, accounting for over 40% of the country’s automotive employment – with a multiplier effect of 21 indirect jobs for every job directly in the auto sector.
With the depth of the local automotive supply chain, the sector overall is the largest employer in the Bay and so the economic impact is not only in the local spending of the manufacturers themselves, but the spending power of their employees as well.
The positive economic and employment impacts – along with the challenges that threaten increased de-industrialisation and loss of investment – apply to the Bay’s other key manufacturing sectors including agro-processing, beverages and pharmaceuticals.
Taking steps to address de-industrialisation is especially critical now, as we face global geo-political shifts, including unpredictable policy shifts in the USA and SA’s eligibility for favourable tariffs under the US’s Africa Growth & Opportunity Act, potentially placing $4 billion in preferential exports mainly in agriculture and automotive at risk.
Rapid advancements in technology and energy include the global shift to new energy vehicles, with an expectation of new emissions targets in Europe this year.
Like South Africa’s, the European vehicle market – the key destination for SA vehicle exports – is facing disruption from more affordable Chinese entrants.
South Africa’s local vehicle production declined last year, while total vehicle imports rose and imported Chinese brands have grown their market share from 2% to 9% in the last five years.
While imports are not a problem in principle, as they potentially offer healthy competition in the local market, this is a concern if imports contribute to reduced domestic production. Increased imports need to be balanced with increased exports. With US and EU markets at risk with President Trump’s views on South Africa and the suppressed European automotive economy, one of the only alternatives is export into Africa. It is therefore an imperative that business with Africa is de-risked especially with access to foreign currencies and payment guarantees.
Free trade rebates and allowances for semi-knocked down manufacturing (SKD, where the vehicle is imported already partly-assembled) under the Automotive Production Development Programme (APDP) are making imports more attractive than local production. Whilst SKD manufacturers try to localise as much as they can, there is a limit as most of the components are part of the assemblies supplied.
Vehicles that are fully locally-built (complete knock-down, or CKD) add greater value to the economy in terms of manufacturing and technology investment, employment, and deeper supply chains including localisation of component manufacturing.
Domestic auto manufacturing is highly export-oriented, with 2 in every 3 locally built vehicles destined for export. Exports are critical in generating economies of scale and achieving international competitiveness, but these are under threat from the shift to new energy vehicles and the entrance of relatively high but affordable Chinese products in our key markets.
Preventing de-industrialisation requires action at government policy level. Such action ranges from the mid-term APDP review, to facilitating African trade and easing tensions with our current export partners.
We believe that it is important that the mid-term review of the APDP be brought forward, into the first half of this year, so that the issues making local production less favourable can be addressed.
The country’s New Energy Vehicle policy and strategy also requires urgent finalisation, taking into account the submissions of industry, to enable planned investments in this sector to proceed. Alongside, incentives to stimulate consumer demand for these vehicles must also be finalised. It is important that this policy also encourage leap-frogging current technologies (battery-electric vehicles) to the next big thing to allow local industry to prepare. In comparison to China, we failed in the development of battery electric vehicles- we were just too slow.
Business needs to take proactive action to reinvent and diversify our manufacturing economy in preparation for the new industrial future – cleaner, greener and highly technology-driven. It is a future that is already here. Policy must be there to support this future and not just incentivise the present. Incentivising the present without encouraging the future, guarantees that we will be stuck in the past.
The Business Chamber’s Local Economy Reinvention Think Tank has brought together industry and technology leaders from diverse local sectors to identify opportunities to build on our existing manufacturing strengths, applying those to future market demands and evolving new materials and technologies.
This is supported by an industry-led skills development initiative, under our new Skills Desk, focused specifically on developing the skills required in these new industries, up-skilling, re-skilling and creating youth employment and training opportunities.
We are committed to driving these interventions to support and grow local manufacturing, while taking action to advocate for the urgently needed policy interventions.
Kelvin Naidoo is Technical Director of Auto-X and Acting President of the Nelson Mandela Bay Business Chamber